There are three finan­cial state­ments that pro­vide a pic­ture of the finan­cial health of your busi­ness:

  1. The Bal­ance Sheet shows what the busi­ness has and what the busi­ness owes, along with its net worth
  2. The Income State­ment is used to give a sum­ma­ry of the company’s rev­enue and expens­es over a peri­od of time
  3. The State­ment of Cash Flows shows how changes in the bal­ance sheet accounts and income affect cash and cash equiv­a­lents

While all busi­ness own­ers are famil­iar with their income state­ment, or P&L, and some busi­ness own­ers look at their bal­ance sheet, very few under­stand the impor­tance of the state­ment of cash flows. The state­ment of cash flows, while some­times dif­fi­cult to under­stand, tells a lot about the health of your com­pa­ny.

The state­ment of cash flows breaks down to 3 types of activ­i­ties:

  1. Oper­at­ing
  2. Invest­ing
  3. Financ­ing

The oper­at­ing sec­tion of the state­ment of cash flows focus­es on the cash inflows and out­flows from your company’s main busi­ness activ­i­ties of buy­ing and sell­ing mer­chan­dise, pro­vid­ing ser­vices, etc.  If busi­ness oper­a­tions are show­ing neg­a­tive cash flows you should look at:

  • your gross prof­it
  • the time­li­ness of col­lect­ing accounts receiv­able
  • how much cash is tied up in inven­to­ry.

The invest­ing sec­tion of the state­ment of cash flows shows the out­flows and inflows relat­ed to the pur­chase and sale of equip­ment and oth­er fixed assets.  Neg­a­tive cash flow from invest­ing is not nec­es­sar­i­ly a bad thing, it is an indi­ca­tion that the com­pa­ny is upgrad­ing.

The financ­ing sec­tion of the state­ment of cash flows shows the inflows and out­flows of cash result­ing from debt, issuance/re-pur­chase of com­pa­ny stock, and div­i­dend payments/distributions.  Pos­i­tive financ­ing cash flow could be a result of busi­ness oper­a­tions being neg­a­tive or an increase of invest­ing activ­i­ties.  If the com­pa­ny is see­ing an increase of financ­ing due to the neg­a­tive cash flow of oper­a­tions this is red flag and should be ana­lyzed.

With­out a cash flow state­ment, it may be dif­fi­cult to have an accu­rate pic­ture of a company’s per­for­mance. The income state­ment will tell you how much inter­est you paid on a loan and the bal­ance sheet will tell you how much you owe, but only the cash flow state­ment will tell you how much cash was con­sumed ser­vic­ing that loan. The income state­ment will record sales and prof­its but it’s the cash flow state­ment that will alert you if those sales aren’t gen­er­at­ing enough cash to cov­er expens­es.

We at Mack­ey Advi­sors are com­mit­ted to help­ing entre­pre­neurs build bet­ter busi­ness­es. If you need assis­tance under­stand­ing your state­ment of cash flows, or any of your finan­cial state­ments please give us a call at 859.331.7755, we’d be hap­py to help!